Professional Documents
Culture Documents
SEPTEMBER 2014
On the Markets
MICHAEL WILSON
Chief Investment Officer
Morgan Stanley Wealth Management
Dont Blink
In last months On the Markets, we discussed the potential market
impact of the Federal Reserves transition from the tapering of
Quantitative Easing (QE) to the inevitable first interest-rate hike. We
thought August might bring more volatility as the Fed began to walk
investors down this path, first with the Jackson Hole symposium,
followed by hints about what it might do at its next Federal Open
Market Committee meeting on Sept. 17. We also suggested investors
be ready to buy into weakness because we thought any market
pullback would be short and sweetand perhaps the last opportunity
for investors to position themselves for the seasonally strong fourth
quarter.
TABLE OF CONTENTS
Bonds Unbound
Nontraditional fixed income strategies
may help investors withstand a rising
interest rate environment.
10
Lo and behold, global equity and credit markets sold off sharply during the first week
of August. However, they rebounded just as sharply, with most ending the month in
positive territory. If you blinked, you would have likely missed it. With August a
popular time for market participants to take vacation, its likely many were caught offguard, either missing the chance to buy the dip or getting whipsawed both ways.
The Global Investment Committee decided not to blink, and added exposure to both
US equities and high yield credit shortly after prices bottomed. Whether this was a
durable low for asset prices remains to be seen, but we believe it will prove to have been
a good entry point for what we think is likely to be a solid finish to 2014.
Our thesis remains the same as its been all year: The tapering of QE is the beginning
of a Fed tightening cycle, but it is not the end of the economic and earnings expansion.
Instead, the period is typically one when risky assets consolidate their initial strong postrecession gains exiting, a sort of pause that refreshes.
While it may not seem like risky assets have consolidated much, we believe that
global equity and credit markets have been going through a rolling correction since the
middle of 2013, when the Fed initially raised the issue of tapering. The correction
started with interest rate-sensitive securities last summer and possibly ended with
European equities in August. The fourth quarter is typically a good time to be fully
invested. Given 12 months of rolling corrections, we decided its probably better to be
early than late to this years party. n
A Framework for
Flexible Investing
ANDREW SHEETS
Chief Cross-Asset Strategist
Morgan Stanley & Co.
Repair
Recovery
Expansion
Downturn
Economic
Growth
Weak,
Improving
Moderate,
Improving
Strong,
Plateauing
Weak,
Deteriorating
Credit Growth
Weak
Accelerating
High
Falling
Central Bank
Policy
Easy
Starting to
Tighten
Tightening
Easing
Inflation
Low, Stabilizing
Moderate,
Rising
High, Rising
Moderate,
Falling
Yield Curve
Steep
Flattening
Flat/Inverted
Steepening
Asset
Valuations
Fundamentals
Profits
Leverage
Credit Versus
Credit, Equity
Credit Preferred
Equity
Both Up
Volatility
Profits
Leverage
Profits
Leverage
Equity
Preferred
Credit, Equity
Both Down
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
'73
'78
'83
'88
'93
'98
'03
'08
'13
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
Scenario
Probability
2014E
2015E
2H15E1H16E
P/E
Ratio
Scenario
Target
Upside /
Downside
20%
122.6
134.9
141.6
17.9
2,540
26.8%
11%
10%
10%
116.0
122.9
126.6
16.2
2,050
2.3%
5%
6%
6%
102.0
102.0
104.0
15.0
1,560
-22.1%
-8%
0%
2%
Growth
Base Case
60%
Growth
Bear Case
20%
Growth
Current S&P 500 Price
2,003
Source: Thomson Reuters, Morgan Stanley & Co. Research as of Aug. 29, 2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
Opportunities in
Innovative Disruption
DAN SKELLY
Senior Equity Strategist
Morgan Stanley Wealth Management
Cloud Computing
The oft-cited migration to the cloud
entails companies shifting on-premises
enterprise servers to the Internet. This
web-based cloud model allows companies
to lower their information technology (IT)
costs, improve application development
and free up valuable resources that were
previously spent on upgrading physical
hardware. A proprietary survey conducted
late last year by Morgan Stanley & Co.
Research (MS & Co.) indicates that more
than two-thirds of companies polled plan
to be running workloads in the public
cloud by the end of 2014, up from half at
the end of 2013. Whats more, a June 2014
survey shows about 9% of their
application workload in the cloud, and
they expect that to grow to 15% by the end
of this year and 21% by the end of 2015
(see chart).
In addition, the latest quarterly survey
of chief information officers by MS &
Co.s tech research team shows that cloud
Energy Efficiency
As corporations deal with environmental regulations, geopolitical tensions
Managed Hosting
Public Cloud
End of 2015
59%
End of 2014
13%
65%
June 2014
14%
71%
0%
20%
7%
40%
21%
6%
14%
60%
80%
15%
6%
9%
100%
Respondents
Source: Morgan Stanley & Co. CIO Survey as of June 25, 2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
Online/Mobile Retailing
Theres typically a burst of consumer
spending that accompanies an economic
recovery, but that hasnt been the case
over the past few years. In the wake of the
Great Recession, employment has been
slow to recover, households have been
focused on paying down debt instead of
taking on new obligations and ultra-low
interest rates have crimped cash flow for
those who depend on interest income. That
said, recent job growth and a likely
imminent uptick in wages portend higher
spending in the next year, according to
Lisa Shalett, a member of the Global
Investment Committee (GIC).
We believe that a material amount of
that spending will take place online rather
than at traditional brick-and-mortar
retailers. A MS & Co. AlphaWise survey
suggests that global eCommerces
penetration of retail sales will increase to
more than 9% by 2016 from 6.5% today; if
so, that means retail eCommerce would
surpass $1 trillion. Furthermore, we
believe that more of that spending will
take place via mobile payments systems as
smartphone usage increases.
We favor retailers that have business
models and core products inherently more
insulated from online competition, namely
club store discounters and homeimprovement stores. Home improvement
fares well in an MS & Co. study of how
threatened/insulated various types of
Critical Maintenance
Energy Efficiency
80 %
70
60
50
30
18
40
24
67
30
43
20
34
0
HVAC
Building
Control
Total
Omni-Channel
Ready
Leases
Leverage Point
Insulation
(1-3 ranked best to worst)
Product
Vulnerability
Superior
Distribution
Supplier
Mindset
Supplier
Concentration
Fire
Other
Elevator
Equipment Electrical
Equipment
Source: AlphaWise, Morgan Stanley & Co. Research as of Sept. 24, 2013
Lighting
Threats
(1-3 ranked best to worst)
Key Item
Concentration
18
24
10
Retail Category
30
33
Do-It-Yourself Auto
13
Home Furnishings
17
Home Improvement
15
Office Supply
21
Consumer Electronics
20
Sporting Goods
20
Pet Supply
21
Discount Stores
15
Vitamins/Supplements
19
Beauty
19
5
Security
Equipment
September 2014
The Spread Between US and German Yields Moved Toward Its All-Time High
200 Basis Points
169
150
145
100
50
0
-50
Spread, 10-Year US Treasury to 10-Year German Bund
Highest Spread
-100
-150
-200
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
Municipals
Going into the summer, the municipal
bond market faced two primary risks that
could have upset matters: the prospect of
rising interest rates and the potential for
outsized volatility from ongoing fiscal
troubles in Puerto Rico, one of the muni
markets largest issuers. Instead, rates
have rallied strongly, and Puerto Rico
anxieties have diminished on the back of
recent credit developments. The net result
has been an overwhelmingly positive
summer for municipal bonds, with the
Barclays Municipal Bond Index now
sporting a year-to-date total return of 7.4%
(as of Aug. 28).
These risks, however, have not been
removed, just delayed. Despite mildly
improving US economic data, US
Treasuries have rallied on troubling
$ 900
700
2.7
500
2.6
300
100
2.5
-100
2.4
-300
-500
2.3
-700
2.2
-900
-1,100
2.1
-1,300
-1,500
Jan '14
2.0
Feb '14
May '14
Jun '14
Aug '14
Source: Thomson Reuters Municipal Market Data, The Bond Buyer as of Aug. 21, 2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
MATTHEW RIZZO
Head of Investment Strategy & Content
Consulting Group Investment Advisor Research
Morgan Stanley Wealth Management
STEVE LEE, CFA
Senior Manager Research Analyst
Consulting Group Investment Advisor Research
Morgan Stanley Wealth Management
Declining Rate
Quarters
Rising Equity
Quarters
Declining Equity
Quarters
1.5%
1.7%
2.4%
-0.3%
1.7
0.9
2.3
-0.8
Barclays US Aggregate
Bond Index
0.2
2.4
1.2
2.2
Note: Based on Morningstar mutual fund categories for 20 years ending June 30, 2014.*
Rising/declining rate quarters based on interest rate movements of the 10-year US Treasury
yield. For equities, rising/declining markets based on the S&P 500 total return. Indices are
unmanaged and not available for direct investment. Index returns, unlike fund returns, do not
reflect any fees or expenses. Past performance does not guarantee future results.
Past performance is not indicative of future returns. Investment returns will fluctuate so
that an investors shares when redeemed may be worth more or less than the original
cost. Please note, current performance may be higher or lower than the performance data
shown. Investors should carefully read the fund prospectus which includes information
on the funds investment objectives, risk as well as charges and expenses along with
other information. Investors should review the information in the prospectus carefully
before investing.
Source: Morningstar, CG IAR as of July 15, 2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
10
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
11
CONSERVATIVE
MODEL 1
14% High Yield
MODEL 2
1% Commodities
3% Emerging Markets
Fixed Income
MODEL 3
2% Commodities
2% MLPs
6% Hedged Strategies
and Managed Futures
2% REITs
1% Emerging
Markets Fixed
Income
8% High
Yield
1% InflationLinked Securities
53%
Investment
Grade Fixed
Income
>>>
MODERATE
14%
Cash
3% MLPs
2% REITs
9% Hedged Strategies
and Managed Futures
1%
Emerging
Markets
Fixed
Income
12% US
Equity
9%
Cash
16% US
Equity
29% Cash
36%
Investment
Grade Fixed
Income
15%
International
Equity
6% High
Yield
28%
Investment
Grade Fixed
Income
3% Emerging
Markets Equity
>>>
MODERATE
3%
Commodities
4%
Cash
22%
International
Equity
5% High
Yield
21% Investment
Grade Fixed Income
4% High
Yield
11% Investment
Grade
Fixed Income
4% MLPs
4%
Commodities
3%
REITs
24% US
Equity
2%
High Yield
26%
International
Equity
2%
Investment
Grade Fixed
Income
28% US
Equity
31%
International
Equity
12% Emerging
Markets Equity
>>>
4%
Commodities
12%
Emerging
Markets
Equity
2%
Cash
MODEL 7
3% REITs
3% REITs
8% Emerging Markets
Equity
AGGRESSIVE
4% MLPs
4% MLPs
20% US
Equity
3% REITs
MODEL 6
MODEL 5
3%
Commodities
6% Emerging
Markets Equity
>>>
MODEL 4
3% MLPs
18%
International
Equity
MODEL 8
4% MLPs
4%
Commodities
32% US
Equity
31%
International
Equity
CASH
26% US
Equity
3% REITs
14% Emerging
Markets
Equity
KEY
35%
International
Equity
GLOBAL EQUITIES
ALTERNATIVE INVESTMENTS
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
12
Relative Weight
Within Equities
US
Overweight
While US equities have done exceptionally well since the global financial crisis, they still offer attractive upside
potential, particularly relative to bonds. We believe the US and global economy continue to heal, making recession
neither imminent nor likely in 2014 or 2015. This is constructive for global equities, including the US.
International Equities
(Developed Markets)
Overweight
We maintain our bias for Japanese and European equity markets given the political and structural changes taking
place in Japan and an improving economic outlook in Europe. Japan underperformed in the first half of 2014 due to the
recently enacted consumption tax. We expect the second half to be better as consumption rebounds. Europe
performed well during the first half, but has sold off sharply on concerns about Russia/Ukraine and the ongoing Asset
Quality Reviews (AQRs) and bank stress tests. We believe most of the bad news is priced in and would add on
weakness before the AQRs and stress tests are completed in October.
Underweight
Emerging markets have surprised to the upside this year. However, we believe performance may be ahead of the
fundamentals and remain underweight. Policy remains out of sync with what is necessary for true reform in many
regions. The Feds rate hike cycle, likely to begin early next year, could have a negative impact. We would only add on
pullbacks and favor India, Mexico, China, Taiwan and Korea.
Emerging Markets
Global Fixed
Income
US Investment Grade
International
Investment Grade
Inflation-Linked
Securities
High Yield
Emerging Market
Bonds
Alternative
Investments
Relative Weight
Within Fixed
Income
Overweight
Equal Weight
Underweight
Overweight
Underweight
We have recommended shorter-duration (maturities) since March 2013 given the potential capital losses associated
with the rising interest rates from such low levels. Yields have risen since then, but not enough for us to change that
advice. However, we recently reduced the size of our overweight in short duration as we expect short-term interest
rates to move higher than the market expects in the next six months. Within investment grade, we prefer BBB-rated
corporates and A-rated municipals over US Treasuries.
Yields are low globally, so not much additional value accrues to owning international bonds beyond some
diversification benefit.
We have been underweight inflation-linked securities since March 2013, given negative real yields across all
maturities. Recently, these yields have turned modestly positive but remain unattractive, in our view, due to the longerduration characteristics of TIPS.
Yields and spreads are near record lows. However, default rates are likely to remain muted as the economy recovers
slowly, keeping corporate and consumer behavior conservative. We prefer shorter-duration and higher-quality (B to
BB) issues and vigilance on security selection at this stage of the credit cycle.
Similar to emerging market equities, we remain underweight on the basis that the beginning of the Feds rate hike
cycle will likely be a disproportionate headwind for emerging market debt relative to other debt markets.
Relative Weight
Within Alternative
Investments
REITs
Equal Weight
Falling interest rates have led to very good performance from REITs this year. At current levels, we believe REITs are
fairly valued and offer select opportunities. The industrial and commercial segments tend to outperform at this stage of
the recovery. Non-US International REITs should also be favored relative to domestic REITs at this point.
Commodities
Equal Weight
Commodities have performed much better in 2014 than in the recent past. Poor weather and rising geopolitical risks
have led to higher prices, reminding us that commodities can provide some ballast to a traditional equity/bond portfolio.
There is also a growing appreciation that China is not the only driver of demand for commodities.
Master Limited
Partnerships*
Equal Weight
Master limited partnerships (MLPs) should continue to do well as they provide diversification benefits to traditional
assets and a substantial yield that is valuable in a low interest rate world. Many MLPs are levered to commodity
consumption, which is more predictable than prices.
Hedged Strategies
(Hedge Funds and
Managed Futures)
Equal Weight
This asset class can provide uncorrelated exposure to traditional risk-asset markets. It tends to outperform equities
when growth slows and works well in more challenging financial markets.
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
13
ON THE MARKETS
Index Definitions
Glossary
CORRELATION A statistical measure of how
two securities move in relation to each other.
This measure is often converted into what is
known as correlation coefficient, which ranges
between -1 and +1. Perfect positive correlation
(a correlation coefficient of +1) implies that as
one security moves, either up or down, the other
security will move in lockstep, in the same
direction. Alternatively, perfect negative
correlation means that if one security moves in
either direction the security that is perfectly
negatively correlated will move in the opposite
direction. If the correlation is 0, the movements
of the securities are said to have no correlation;
they are completely random. A correlation
greater than 0.8 is generally described as strong,
whereas a correlation less than 0.5 is generally
described as weak.
on
SHORT SELLING
statistical
quantifies the volatility associated with a
portfolios returns by measuring the variation
in returns around the mean return. Unlike
beta, which measures volatility relative to the
aggregate market, standard deviation measures
the absolute volatility of a portfolios return.
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
14
Risk Considerations
Alternative Strategy Mutual Funds
Alternative strategy mutual funds may employ various investment strategies and techniques for both hedging and more speculative purposes such as
short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. Non-traditional investment options and
strategies are often employed by a funds portfolio manager to further a funds investment objective and to help offset market risks. However, these
features may be complex, making it more difficult to understand the funds essential characteristics and risks, and how it will perform in different
market environments and over various periods of time. They may also expose the fund to increased volatility and unanticipated risks particularly
when used in complex combinations and/or accompanied by the use of borrowing or leverage. The funds prospectus will contain information and
descriptions of any non-traditional and complex strategies utilized by the fund.
MLPs
Master Limited Partnerships (MLPs) are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited
partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently, most MLPs operate in
the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies in the
energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.
Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance
on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity
volume risk.
The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is
deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for
distribution to the fund which could result in a reduction of the funds value.
MLPs carry interest rate risk and may underperform in a rising interest rate environment. MLP funds accrue deferred income taxes for future tax
liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as
capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP funds after-tax performance
could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
Duration
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio.
The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Generally, if interest rates rise, bond prices
fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing
interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as
compared to the price of a short-term bond.
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and
economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets,
since these countries may have relatively unstable governments and less established markets and economies.
Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures
funds, and funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to
leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack
of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less
regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.
Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally
illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually suitable only for the risk capital portion of an
investors portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus
and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended
to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to,
(i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events,
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
15
war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence,
technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary
distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long
term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold
in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest
or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities
that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (SIPC) provides
certain protection for customers cash and securities in the event of a brokerage firms bankruptcy, other financial difficulties, or if customers assets
are missing. SIPC insurance does not apply to precious metals or other commodities.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk.
Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date.
The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the
maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the
risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk
that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater
credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives
and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax
(AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if
securities are issued within one's city of residence.
Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation
by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is
linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Derivative instruments. Options, futures contracts, options on futures contracts, forward contracts, swaps and structured products are examples of
derivative instruments. Risks of derivative instruments include imperfect correlation between the value of the instruments and the underlying assets;
risks of default by the other party to certain transactions; risks that the transactions may result in losses that partially or completely offset gains in
portfolio positions; and risks that the transactions may not be liquid. Please see the funds prospectus for additional information.
Options are not suitable for every investor. This sales material must be accompanied by or preceded by a copy of the booklet 'Characteristics and
Risks of Standardized Options' (ODD). Investors should not enter into options transactions until they have read and understood the ODD. Before
engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the
risks involved, including, without limitation, the risks pertaining to the business and financial condition of the issuer of the underlying security or
instrument. Options investing, like other forms of investing, involves tax considerations, transaction costs and margin requirements that can
significantly affect the profit and loss of buying and writing options. The transaction costs of options investing consist primarily of commissions (which
are imposed in opening, closing, exercise and assignment transactions), but may also include margin and interest costs in particular transactions.
Transaction costs are especially significant in options strategies calling for multiple purchases and sales of options, such as multiple leg strategies,
including spreads, straddles and collars. A link to the ODD is provided below: http://www.optionsclearing.com/about/publications/character-risks.jsp.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the
performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan
Stanley Smith Barney LLC retains the right to change representative indices at any time.
REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited
diversification and sensitivity to economic factors such as interest rate changes and market recessions.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency,
economic and market risks.
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
16
Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and
market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and
domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied
economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These
risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in
countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
The majority of $25 and $1000 par preferred securities are callable meaning that the issuer may retire the securities at specific prices and dates
prior to maturity. Interest/dividend payments on certain preferred issues may be deferred by the issuer for periods of up to 5 to 10 years, depending
on the particular issue. The investor would still have income tax liability even though payments would not have been received. Price quoted is per
$25 or $1,000 share, unless otherwise specified. Current yield is calculated by multiplying the coupon by par value divided by the market price.
The initial rate on a floating rate or index-linked preferred security may be lower than that of a fixed-rate security of the same maturity because
investors expect to receive additional income due to future increases in the floating/linked index. However, there can be no assurance that these
increases will occur.
The market value of convertible bonds and the underlying common stock(s) will fluctuate and after purchase may be worth more or less than
original cost. If sold prior to maturity, investors may receive more or less than their original purchase price or maturity value, depending on market
conditions. Callable bonds may be redeemed by the issuer prior to maturity. Additional call features may exist that could affect yield.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
Credit ratings are subject to change.
Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not
be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase,
holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This
material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or
other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors,
including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.
Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this
material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own
independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision,
including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain
material information not contained herein and to which prospective participants are referred. This material is based on public information as of the
specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or
warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated
information on the securities/instruments mentioned herein.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy
will depend on an investors individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and
income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates,
securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future
performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions
may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the
projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any
projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.
Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not
materially differ from those estimated herein.
Please refer to important information, disclosures and qualifications at the end of this material.
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This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is
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Morgan Stanley Smith Barney LLC.
2014 Morgan Stanley Smith Barney LLC. Member SIPC.
Please refer to important information, disclosures and qualifications at the end of this material.
September 2014
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